ACIT, Kannur V. M/s.Tellicherry Co-op Hospital Society Ltd, Thalassery

ITA 404/COCH/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6223 (ITAT-COCHIN)
• Duration Of Justice: 9 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-04-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 31-03-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 06-06-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: LATHA V KUMAR
• Assessee Lawyers: T M SREEDHARANLD SR COUNSE L
• Section: 14A

Judgement Text

1 ITA NO.404/COCH/2013 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE SHRI N.R.S. GANESAN (JM) AND SHRI B.R. BASKA RAN(AM) I.T.A NO. 404/COCH/2013 (ASSESSMENT YEAR 2008-09) THE A.C.I.T., CIR.1 VS M/S TELLICHERRY CO-OP HO SPITAL KANNUR SOCIETY LTD, KODUVALLY TELLICHERRY 670 101 PAN : AAAAT3098A (APPELLANT) (RESPONDENT) APPELLANT BY : SMT. LATHA V KUMAR RESPONDENT BY :SHRI T.M. SREEDHARAN,LD.SR.COUNSE L DATE OF HEARING : 31-03-2004 DATE OF PRONOUNCEMENT : 04-04-2014 O R D E R PER N.R.S. GANESAN (JM) THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A), KOZHIKODE DATED 13-03-2013 PERTAINING TO AS SESSMENT YEAR 2008- 09. 2. SMT. LATHA V KUMAR, THE LD.DR SUBMITTED THAT THE ASSESSEE CO- OPERATIVE SOCIETY IS RUNNING A HOSPITAL AND NURSING SCHOOL. ACCORDING TO 2 ITA NO.404/COCH/2013 THE LD.DR, THE ASSESSEE CO-OPERATIVE SOCIETY ADVANC ED A SUM OF RS. 2,21,74,000 FOR ACQUIRING THE SHARES OF TELLICHERRY MEDICAL FOUNDATION & INFRASTRUCTURE LTD. ACCORDING TO THE LD.DR, TELLIC HERRY MEDICAL FOUNDATION & INFRASTRUCTURE LTD IS NOT THE SISTER CONCERN OF T HE ASSESSEE. TELLICHERRY MEDICAL FOUNDATION & INFRASTRUCTURE LTD IS ENGAGED IN THE BUSINESS OF CONSTRUCTION OF MULTI STOREYED BUILDING AT TELLICHE RRY. ACCORDING TO THE LD.DR, THE ADVANCE MADE BY THE ASSESSEE IN THE SHAR ES OF TELLICHERRY MEDICAL FOUNDATION & INFRASTRUCTURE LTD IS FOR THE PURPOSE OF EARNING INCOME WHICH IS EXEMPT FROM TAXATION. ACCORDING TO THE LD.DR, IN VIEW OF SECTION 14A OF THE ACT, THE EXPENDITURE INCURRED FO R THE PURPOSE OF EARNING OF INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME CANNOT BE ALLOWED AS AN EXPENDITURE. REFERRING TO THE ORDER OF THE C IT(A), MORE PARTICULARLY, PARAGRAPH 4.2, THE LD.DR SUBMITTED THAT THE CIT(A) MISUNDERSTOOD THE FACTS OF THE CASE. ACCORDING TO THE LD.DR, THE BUS INESS OF THE ASSESSEE IS RUNNING HOSPITAL AND THE BUSINESS OF TELLICHERRY ME DICAL FOUNDATION & INFRASTRUCTURE LTD IS THAT OF CONSTRUCTION OF MULTI STOREYED BUILDINGS. THE RECIPIENT OF THE AMOUNT IS NOT ENGAGED IN SAME LINE OF BUSINESS AS THAT OF THE ASSESSEE, BUT THE CIT(A) OBSERVED THAT THEY ARE ENGAGED IN SAME LINE OF BUSINESS. ACCORDING TO THE LD.DR, THE ADVANCE M ADE BY THE ASSESSEE IS NOT FOR ANY BUSINESS EXPEDIENCY. A CO-OPERATIVE SO CIETY IS A DIFFERENT ENTITY AND A PRIVATE LIMITED COMPANY IS ALTOGETHER DIFFERENT AS IT IS AN ARTIFICIAL ENTITY. THEREFORE, BOTH CANNOT BE SISTE R CONCERN TO EACH OTHER. A 3 ITA NO.404/COCH/2013 CO-OPERATIVE SOCIETY UNDER THE CO-OPERATIVE SOCIETI ES ACT HAS TO FUNCTION UNDER THE PROVISIONS OF THE COP-OPERATIVE SOCIETIES ACT AS PER THE DECISION TAKEN BY MAJORITY OF THE MEMBERS OF THE SO CIETY. THEREFORE, THE RECIPIENT COMPANY CANNOT BE A SISTER CONCERN OF THE ASSESSEE CO-OPERATIVE SOCIETY. HENCE, THE ADVANCE MADE BY THE ASSESSEE C ANNOT BE CONSIDERED TO BE AN INVESTMENT FOR BUSINESS PURPOSE. 3. ON THE CONTRARY, SHRI T.M. SRIDHARAN, THE LD.SEN IOR COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE INVESTED A SUM OF RS.2,21,74,000 IN THE PREFERENTIAL SHARES OF TELLICHERRY MEDICAL FOUN DATION & INFRASTRUCTURE LTD. ACCORDING TO THE LD.SENIOR COUNSEL, IT IS AN INVESTMENT FOR BUSINESS PURPOSE. THE DIVIDEND EARNED ON THE INVESTMENT MAD E IN THE PREFERENTIAL SHARES IS TAXABLE UNDER THE INCOME-TAX ACT. THEREF ORE, THIS WILL FORM PART OF THE TOTAL INCOME. ACCORDING TO THE LD.SENIOR CO UNSEL FOR THE ASSESSMENT YEAR 2007-08 THE ASSESSEE OFFERED THE DIVIDEND INCO ME EARNED ON THE INVESTMENT MADE IN TELLICHERRY MEDICAL FOUNDATION & INFRASTRUCTURE LTD AND THE SAME WAS ASSESSED IN THE HANDS OF THE ASSES SEE. FOR THE YEAR UNDER CONSIDERATION, ACCORDING TO THE LD.SENIOR COU NSEL, NO DIVIDEND WAS DECLARED BY TELLICHERRY MEDICAL FOUNDATION & INFRAS TRUCTURE LTD, THEREFORE, NO INCOME WAS OFFERED. ON A QUERY FROM THE BENCH, HOW THE ASSESSEE CLAIMS THAT DIVIDEND RECEIVED BY THE ASSESSEE FROM TELLICHERRY MEDICAL FOUNDATION & INFRASTRUCTURE LTD WAS OFFERED FOR TAX ATION FOR THE ASSESSMENT 4 ITA NO.404/COCH/2013 YEAR 2007-08, THE LD.REPRESENTATIVE VERY FAIRLY SUB MITTED THAT THE MATTER MAY BE REMITTED BACK TO THE FILE OF THE ASSESSING O FFICER FOR VERIFICATION. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ONLY ISSUE ARISES FOR CONSIDERATION IS DISALLOWANCE OF INTEREST OF RS.36, 58,000 ON THE INVESTMENT MADE BY THE ASSESSEE IN TELLICHERRY MEDICAL FOUNDAT ION & INFRASTRUCTURE LTD. THE INVESTMENT MADE BY THE ASSESSEE IS FROM B ORROWED FUNDS. WHEN THE BORROWED FUNDS WERE DIVERTED FOR NON BUSIN ESS PURPOSE, THE INTEREST PAYABLE ON SUCH BORROWED FUNDS CANNOT BE C LAIMED AS EXPENDITURE IN THE HANDS OF THE ASSESSEE. IN THIS CASE, THE ASSESSEE CLAIMS THAT THE ASSESSEE MADE AN INVESTMENT TO THE EXTENT OF RS.2,21,74,000 IN THE PREFERENTIAL SHARES OF TELLIC HERRY MEDICAL FOUNDATION & INFRASTRUCTURE LTD. IT IS ALSO THE CLAIM OF THE ASSESSEE THAT THE DIVIDEND RECEIVED FROM TELLICHERRY MEDICAL FOUNDATION & INFR ASTRUCTURE LTD WAS OFFERED FOR TAXATION FOR THE ASSESSMENT YEAR 2007-0 8. FOR THE YEAR UNDER CONSIDERATION THE ASSESSEE CLAIMS THAT NO DIVIDEND WAS DECLARED BY TELLICHERRY MEDICAL FOUNDATION & INFRASTRUCTURE LTD . THEREFORE, THE LOWER AUTHORITIES HAD NO OCCASION TO EXAMINE WHETHER THE DIVIDEND DECLARED BY TELLICHERRY MEDICAL FOUNDATION & INFRASTRUCTURE LTD IS SUBJECTED TO TAXATION IN THE HANDS OF THE ASSESSEE. IT IS ALSO TO BE EXA MINED WHETHER THE DIVIDEND WAS ASSESSED IN THE HANDS OF TELLICHERRY M EDICAL FOUNDATION & INFRASTRUCTURE LTD AS TAX ON DISTRIBUTION OF DIVID END UNDER SECTION 5 ITA NO.404/COCH/2013 115(O)(1) OF THE ACT. IF IT IS SUBJECTED TO TAXATI ON IN THE HANDS OF TELLICHERRY MEDICAL FOUNDATION & INFRASTRUCTURE LTD U/S 115(O)( 1), THEN THE ASSESSEE MAY NOT BE LIABLE TO PAY ANY TAX. IN OTHER WORDS, IT MAY NOT BE NECESSARILY TO BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE IN CASE THE DIVIDEND RECEIVED BY THE ASSESSEE WAS INCLUDED IN THE TOTAL INCOME OF TELLICHERRY MEDICAL FOUNDATION & INFRASTRUCTURE LTD U/S 115(O)( 1) OF THE ACT. 5. THE LD.DR HAS ALSO PLACED RELIANCE ON THE JUDGEM ENT OF THE KERALA HIGH COURT IN CIT VS POPULAR VEHICLES & SERVICES LT D (2010) 189 TAXMAN 14 (KER). THE KERALA HIGH COURT EXAMINED THE ISSUE WHETHER INTEREST PAID BY THE ASSESSEE ON BORROWED FUNDS DIVERTED AS INTER EST FREE LOAN TO PARTNERSHIP FIRM IN WHICH THE ASSESSEE WAS A PARTNE R WAS AN ALLOWABLE DEDUCTION U/S 36(1)(III) OF THE ACT OR NOT? THE KE RALA HIGH COURT, AFTER EXAMINING THE PROVISIONS OF THE INCOME-TAX ACT FOUN D THAT SECTION 14A(1) EXPRESSLY BARS ALLOWANCE OF ANY EXPENDITURE ON EARN ING INCOME WHICH DOES NOT CONSTITUTE PART OF THE TOTAL INCOME OF THE ASSESSEE. SINCE THE ASSESSEE, BEFORE THE KERALA HIGH COURT ADVANCED INT EREST FREE LOAN TO THE PARTNERSHIP FIRM IN WHICH IT WAS A PARTNER AND IT D ID NOT RECEIVE ANY INTEREST FROM THE SAME AND THAT THE ONLY BENEFIT WAS RECEIPT OF SHARE INCOME FROM SUCH FIRM, DID NOT CONSTITUTE INCOME OF THE ASSESSE E U/S 10(2A) OF THE ACT. IN THIS CASE ALSO, THE ASSESSEE HAS NOT RECEIVED AN Y INTEREST FROM TELLICHERRY MEDICAL FOUNDATION & INFRASTRUCTURE LTD . THE ASSESSEE IS 6 ITA NO.404/COCH/2013 ENTITLED ONLY FOR THE DIVIDEND ON THE INVESTMENT MA DE IN PREFERENTIAL SHARES. THE QUESTION ARISES FOR CONSIDERATION IS W HETHER THE DIVIDEND INCOME RECEIVED BY THE ASSESSEE IS LIABLE TO BE INC LUDED IN THE TOTAL INCOME OF THE ASSESSEE OR NOT? IF THE DIVIDEND INC OME RECEIVED / RECEIVABLE BY THE ASSESSEE WOULD FORM PART OF THE T OTAL INCOME OF THE ASSESSEE, THEN THE INTEREST ON THE BORROWED FUNDS F OR MAKING THE INVESTMENT WOULD BE AN ALLOWABLE EXPENDITURE. IN C ASE, IF THE DIVIDEND INCOME RECEIVED BY THE ASSESSEE FROM TELLICHERRY ME DICAL FOUNDATION & INFRASTRUCTURE LTD WOULD NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE THEN THE INTEREST ON THE BORROWED FUNDS FOR MAKING SUCH INVESTMENT CANNOT BE ALLOWED AS EXPENDITURE IN VIEW OF THE JUDGMENT O F THE KERALA HIGH COURT IN THE CASE OF POPULAR VEHICLES & SERVICES LTD (SUP RA). SINCE THE FACTUAL ASPECT NEEDS TO BE VERIFIED, THE ORDER OF THE ASSES SING OFFICER IS SET ASIDE AND THE MATTER IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL RECONSIDER THE MATTER FRESH IN THE LIGHT OF THE MATERIAL AVAILABLE ON RECORD AND THEREAFTER DECIDE THE ISSUE IN ACCORDANCE WITH LAW IN THE LIGHT OF JUDGMENT OF THE KERALA HIG H COURT IN THE CASE OF POPULAR VEHICLES & SERVICES LTD (SUPRA) AFTER GIVIN G REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 6. IN THE RESULT, APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSE. 7 ITA NO.404/COCH/2013 ORDER PRONOUNCED IN THE OPEN COURT ON THIS 04 TH APRIL, 2014. SD/- SD/- (B.R. BASKARAN) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN, DT : 04 TH APRIL, 2014 PK/- COPY TO: 1. THE ACIT, CIR.1, KANNUR 2. M/S TELLICHERRY CO-OP HOSPITAL SOCIETY LTD, KODU VALLY, TELLICHERRY 670 101 3. THE COMMISSIONER OF INCOME-TAX, KOZHIKODE 4. THE COMMISSIONER OF INCOME-TAX(A), AAYAKAR BHAVA N, MANANCHIRA, KOZHIKODE 673 001 5. THE DR (TRUE COPY) BY ORDER ASSTT. REGISTRAR, INCOME-TAX APPELLATE TRIBUNAL, COCHIN BENCH